1.
The Department of Defense (DoD) and the Justice Department (DoJ) must "jump
start" mid-tier mergers and acquisitions (M&A) to ensure that "mega-primes"
do not become so cost-competitive that internal "make-or-buy" decisions
for on-board subsystems (e.g. radar, avionics, electronic countermeasures) become
"make" decisions by default;
2.
While DoD previously procured "federated subsystems" by conducting "full
& open" competitions for each subsystem, recent acquisition reforms "bundle"
those subsystem procurements into "turn-key" platforms under performance
specifications and Total Systems Performance Responsibility (TSPR). This effectively
delegates subsystem authority to the platform prime contractor, making all on-board
subsystems a "make-or-buy" decision at the discretion of the "mega-prime;"
3.
Past supplier concerns have focused on proprietary technical "discriminators,"
developed by "mega-primes" at government expense, from huge Independent
Research & Development (IR&D) pools;
4.
However, recent actions by Raytheon's Dan Burnham (eliminating 16% of employees
or 14,000) have vastly accelerated the gradual streamlining of the "mega-primes,"
effectively triggering a "cost race" among the "mega-primes;"
5.
Consequently, unless DoD and DoJ "jump start" mid-tier consolidation
within the next 6-12 months - to enable "black box" suppliers to shed
excess capacity and evolve to "full subsystem capability" - the "mega-primes"
will not even get to technical capabilities in many "make-or-buy" decisions
because the cost differences will be so great;
6.
"Jump starting" the mid-tier consolidation - which has largely foundered
from lack of a firm DoD/DoJ "safe harbor" policy in the wake of the
failed Lockheed/Northrop transaction - will drive additional "inefficiencies"
out of the rest of the industrial base. That will enable the remaining suppliers
to become more cost-competitive, better focused on investing in major programs,
more capable of enhancing technical capabilities, and better able to manage "subsystem"
risk to their "mega-prime" customers. That will be a "win/win"
for the platform primes, DoD, and the shareholders.
1. The U.S. is politically
and budgetarily committed to coalition warfare in concert with our principal European
allies;
2. Additionally,
the DoD commitment to real-time "sensor-to-shooter" use of smart weapons
is enabled by "inter-operability" in key areas such as C4ISR, rapid
mobility and logistics;
3.
That inter-operability drives opportunities for European contractors to supply
"full subsystems" from development through production, instead of the
traditional "swap-out" of U.S. components for in-country content in
tail-end production exports;
4.
That opportunity for European contractors to provide "full subsystems capability"
is facilitated by DoD's shift to purchase of "turn-key" platforms among
"mega-teams," as opposed to historic "full & open" competitions
for each on-board subsystem (e.g. radar, electronic countermeasures, avionics)
by parochial service commands;
5.
DoD is now seeking to expand that "mega-downselect" model to competing
U.S./European teams on such programs as Tracer/FSCS;
6.
However, recent events have vastly accelerated the formation of "Fortress
Europe" with the U.K./France/Germany agreement to form the European Aerospace
& Defence Company (EADC);
7.
This anxiety in Europe is heightened by political sensitivity over jobs, because
many European aerospace & defense contractors generate as much as 80-90% of
their revenue from sales abroad. This is even further intensified by the looming
recession in both Europe and the U.S., triggered by the "Asian flu;"
8.
Consequently, the EADC is driven by a tremendous desire to compete equally with
perceived U.S. clout in Asia and the Middle East, and to negotiate trans-atlantic
programs as "equals;"
9.
Unfortunately, the creation of a single EADC will preclude DoD's ability to conduct
vigorous competitions among trans-atlantic "mega-teams." There will
then only be one dominant "European consortium," as opposed to highly-competitive
contractors in individual European countries. This will effectively stifle the
very trans-atlantic defense cooperation that is so crucial to saving American
lives on the battlefield;
10.
This means that U.S. "stakeholders" (e.g. DoD, the Justice Department
or the Federal Trade Commission, Congress, etc.) have an immediate incentive to
demonstrate their trans-atlantic commitment by encouraging at least one, or more,
U.S. mid-tier defense purchases by U.K. contractors. This would possibly be in
addition to one smaller purchase by German and/or French concerns in an uncontroversial
area. Further, DoD must accelerate the issuance of longer-term policies to balance
competing domestic and international industrial base interests.
